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Why Groupon Won't Work

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November 15, 2011 – Comments (0) | RELATED TICKERS: GRPN , GOOGL , AMZN

Before I get started, let me be perfectly clear:

I love Groupon (Nasdaq: GRPN).

I check the site daily, buy vouchers weekly, and have willingly offered them my email address on multiple occasions. Considering the full-scale war I’m currently waging to protect my inbox from unwanted solicitations, that last concession should give you a good idea of just how much I respect what this young company is up to.

The problem is, I also happen to love what LivingSocial is up to. And eBay. And Amazon (Nasdaq: AMZN), and Craigslist, and virtually* every other website that proposes to give me what I want for the price I want. In the age of dime-a-dozen digital revolutions, the online advances that resonate most strongly with me are not social (Facebook, Twitter) or recreational (Angry Birds, or that game where you pretend to be a farmer) in nature, but rather, and unsurprisingly, financial. While I appreciate simulated corn-harvesting and ex-girlfriend stalking as much as the next guy, in times like these, I cannot help but see the truest value of the Internet in its offering me:

1) Very real, very immediate savings on everything from printer cartridges to Tuesday night’s dinner.

2) The ability to infinitely cross-reference in my ongoing quest to maximize those savings.

Over the past year, Groupon has notoriously spent massive amounts of money—keeping them firmly in the red—in an effort to acquire new costumers, in new cities, for what amounts to a lion’s share of the global market. The guiding principle is, I believe, that by being the first and loudest on the scene, Groupon can win over a costumer base that will stick with them as the copycats come rumbling into town.

To which I say: fat chance.

To flesh out point #2 a bit more explicitly, in terms of my allegiance as an online consumer, I am loyal to my wallet and my wallet only. Faced with two similar deals, from two competing sites, the sole deciding factor in my eventual purchase is the bottom line—how much I owe when I click “buy”. I am, in that sense, an absolute mercenary, willing to shift my business for literally a penny less, and patently unaffected by whatever worldview a company might employ to keep me from doing so. In other words, yes, I am mildly charmed by the “personality” Groupon exudes in offering me discount pottery (or pole dancing) classes, but at the end of the day, that charm wears thin in the face of a better-priced offer for something that I actually need. As in: Tuesday night’s dinner.

Now I won’t altogether preclude the possibility of my being alone in my soullessness here*, but I suspect the vast majority of the voucher-browsing population is of a similar mind on this one.  The only way, then, for Groupon to maintain anything akin to a “loyal” costumer base is for them to consistently offer the most compelling discounts on things that the public most consistently needs. Simple enough, right?

Wrong.

The biggest obstacle in the Groupon business plan is that they must cater to two client bases: costumers and merchants. As is, they already offer the latter something obscenely low (to the tune of .25 on the dollar) in return for the exposure provided by being featured in a daily deal.  And while there’s a healthy number of mom-and-pops currently in line for their turn at stardom, it isn’t difficult to imagine the point at which that enthusiasm tapers. If Groupon cannot produce evidence in stark rebuttal to bearish claims that their service encourages one-and-done costumers, as opposed to bonafide patrons, for individual businesses, then those businesses will be hard pressed to stay in bed with what is essentially a money-losing proposition. In that scenario, Groupon’s only recourse will be to sweeten the deal by offering merchants a bigger slice of the pie. Given their current financial position, I don’t see a move like that doing much for shareholder confidence.

Which brings us, finally, to the tightrope strung up between a rock and a hard place.

Groupon can only maintain a dominant status in their quickly emerging market by offering costumers the most cut-throat deals, which in turns means either taking a hit (and losing revenue) or asking merchants to take a hit (and losing merchants). Their only other hope is to establish themselves as a generator of repeat costumers, and even in that, the best possible outcome, some serious dangers lay lurking around the corner: once the model has been established as mutually profitable and the good faith of local merchants has been won over, big-hitters like Google (Nasdaq: GOOG) and Amazon* will have no reason not to sweeten the deal  for both client groups, stomach some temporary losses, and make serious runs for the throne. In other words, and to engage in some brutal e-cynicism, Groupon either loses money and dies, or makes money and gets killed.

And to make matters worse, that costumer loyalty they keep breaking the bank for?

It doesn’t exist.

 

 

*Pun intended? You be the judge.

*Wouldn’t be the first time.

*Both of which are doing at not-so-good job at concealing their interest (see: Google Offers, LivingSocial), and a very good job at making sure the water's right before they jump in. 

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